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The OFT: payday lenders must change

The OFT’s review of payday loan companies uncovered evidence of widespread irresponsible lending. The OFT’s David Fisher explains why it has given 50 payday lenders 12 weeks to change their business practices.

We’re not talking about a few rogue firms; far from it. There are serious problems across the market, with lenders large and small, from the advertising of payday loans to the collection of debts. This is unacceptable, which is why we are requiring all payday lenders to improve the way they do business.

12 weeks to clean up their act

We are paying particular attention to 50 of the largest payday lenders – accounting for over 90% of the market. Each of these lenders will receive a detailed account of the problems we have discovered with the way they do business. They will then have 12 weeks to demonstrate to our satisfaction that they’ve tackled the problems or risk losing their licence to do business.

Lenders need to understand that the payday sector is one of our top enforcement priorities and we will use the full range of tools available to us, including the power to suspend licences where appropriate.

Problems with payday loans sector

We also found that the problems with this industry go beyond failure to comply with standards. We believe that there are fundamental problems with the way competition is working in this market, which is rooted in the incentives the companies have.

This is best illustrated by their failure to adequately assess whether prospective customers can afford to repay loans, which they are required to do before making them. Yet half their revenues come from customers who fail to repay on time; so lenders have a financial incentive to make loans to people who cannot afford to repay them on time.

That is why we propose to refer the market to the Competition Commission, which will be able to get to the heart of these matters and, if appropriate, require radical changes.

Which? Conversation provides guest spots to external contributors. This is from David Fisher, the Office of Fair Trading’s director of consumer credit. All opinions expressed here are David’s own, not necessarily those of Which?.

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Glad to see that the OFT is at last tackling the practices and problems of “Payday” lenders.

However it has to accepted that with all loans, except where the borrower is already “known” to the lender, there will be administrative costs which are passed on as an admin fee.
The more checks etc that are carried out by the lender the higher the costs involved.

For very short term loans this fee will look disproportionate compared to the interest on the loan and will result in a very high APR and I do see some sense in the argument that APR is not an appropriate statistic to use for very short term loans.

If the government wanted to REALLY stop irresponsible lending – it should run a a low cost loan system for the people living below the poverty line who can’t get loans by traditional means. I’ve spent years helping poor and vulnerable people budget – and sadly they can’t get loans – The alternative is to steal.

Is it wrong for firms to offer such loans or is it wrong to allow people to take them out? There’s obviously a market for them. It may not be too much of a generalisation to suggest that those that go for these pay day loans don’t look at the small print. An extra thirty pounds at the end of the month doesn’t seem too much to get out of an immediate fix. Of course when payment time comes and passes, serious trouble follows swiftly on. While the rest of us cope with expensive months by using the credit cards to take the strain, some can’t do this. These companies do need to be more selective in their lending and the interest is obscene even if it is clearly presented to the borrower. I am glad that the government is taking action via the O.F.T. The questions still remain. Should the state ban these companies from trading in this market and, do they have a responsibility to protect the borrowers from themselves? It takes two to trade.